Written by: Leo Hart

NCM has just completed the spring cycle of 20 Group meetings, each focusing a large segment of meeting room time to the Parts Department. Truth be told, we had not focused on this discipline for a number of years, being more concerned about the variable sales and expense management areas of our auto retail business. Have you ever been broadsided, completely unaware the hit was coming?

As a result of the discussions, a few crises became apparent. One wakeup call for me was the manufacturer continuing to increase its control of your inventory investment, effectively siphoning cash out of your store. My second revelation was the dealer not being informed or conversant about current inventory purchasing and returns programs. Third was the discomforting old problem of a long-term, trusted parts manager taking advantage of his tenure, resting on his laurels and allowing the departmental profitability to evaporate.

All of the above issues come down to one problem: Leadership has taken its eye off the Parts ball and they have not demanded discipline of their parts manager to some standards and net profit levels.

My most important takeaways derived from all of these parts discussions were:

1. Define a day’s supply number you can live by. One dealer had $200,000 of parts with no sale over 12 months. He also had $500,000 in excess inventory day’s supply. I can live with 45 days supply, but many dealers are beating the 30 day supply mark with daily stock order availability.  Numerous dealers were purchasing on an emergency basis 60% of the parts they were selling each month. The inventory they owned was stagnant.
2. Separate the wholesale operation from the retail service support operation. One dealer’s parts manager, a big wholesaler, based most inventory purchase decisions on wholesale marketing strategies, not the demands for customer repair order parts. It seemed the purchase decisions were made based on what could be made on the purchase discounts, not on customer demand. Be mindful that manufacturers are reducing the return allowances.
3. Be aware of why your customer repair order parts margins are what they are.  One member had an 18% margin on customer repair parts and he did not know why that was. This can be monitored each day through your DMS and by service advisor. Matrix pricing still works, allowing the repair parts margins to compensate for the competitive parts margins. I still like to see an overall customer repair order parts margin in excess of 42%.
4. Do an annual parts inventory with the help of an outside consulting or auditing firm.  At the very least, check the bins on a rotational basis throughout the year, correcting counts and incorrect locations.  Some dealers work a cycle count allowing for a complete inventory check each quarter.  Can you imagine an error rate of nearly 30% in the accuracy of your bins?  It happened; it is happening now. One dealer, having asked his parts manager what an inventory reconciliation looked like, found the manager did not know. Hard to believe? I believe it.
5. Net profit is for Parts Departments, too. Prior to the recession, I always looked for Parts to be easily profitable at 30% of gross on up to 45 % of gross profit produced, depending on the franchise.  Lately, I have seen Parts Departments only at breakeven, not to mention the excess personnel attributed to parts. Get the expenses in line with the parts gross you are currently developing. This is not brain surgery, and your DMS does most of the counting work for your personnel, not to mention the help the manufacturer contributes to the ordering process.
6. Know your manufacturer programs, how you earn purchase discounts, how to protect yourself through the return process. I heard one confession in the meeting room where a parts manager had purchased another truckload of engines to build his return allowance credits, telling the dealer that was what he had to do. However, upon further investigation, the dealer found that the $65,000 purchase did not increase his return allowance, which further depleted the cash in the store. I also heard that General Motors is expanding the number of part numbers that dealers should carry to be RIM compliant, further siphoning cash from the dealers.  We are talking about thousands of newly-recommended part numbers, as RIM will demand 85% compliance and as much as 100% compliance on many more part numbers that are newly classified as “Service Drive Required” parts. OUCH! Other manufacturers may be doing these same things under their customer retention banners.
7. Know the specific criteria and process for returning parts, as well as cores and warranty parts for review. You probably cannot even return a special order part. It is usually most important that the packaging of the returned part be submitted with the defective part. We heard one story where a parts manager decided that warranty return parts were not his concern and threw out all the warranty parts to be returned, putting the dealer at risk of losing the value of all those claims.

In conclusion, get involved in your Parts investment.  For some dealers, this is a large bank account in itself.  If it is not in perfect order, you probably need to get outside help for your manager or you may need new Parts management.

Leo Hart is an executive conference moderator for a number of NCM Associates 20 Groups, including franchised and multi-store dealership operations. You can reach Leo at 913.649.7830 or email lhart@ncm20.com.